Hot Spots: Iraq.(international)

While the collapse of world market prices for oil has clearly worsened the outlook for Iraq's external accounts, the country is not facing any insuperable problems on this score. Its old foreign debt has been largely forgiven or rescheduled. There is an SDR 475 million standby agreement with the IMF in place (which Baghdad treats as precautionary, as a facility on which it intends to draw only in an extreme emergency), and the volume of oil production has increased. The nation earned in 2008 about USD 60 billion from average exports of crude of 1.85 million bpd. This means that shipments were up about 200,000 bpd from 2007 and revenues were USD 20 billion higher.

This year will bring a big setback, to be sure, but Iraq's international reserves stand at over USD 45 billion and are quite comfortable. The real problem is that the country has come to rely far too much on oil for state revenues (close to 95%) and the plunge in petroleum prices by roughly USD 100 a barrel in the past nine months is bound to slow the economy's recovery. In the non-oil sector, cheap imports from Iran have been putting pressure on local manufacturers. This has much to do with past efforts by the United States to make sure that the Iraqi economy becomes a wide-open, globalized one.

To this end, the U.S. Coalition Provisional Authority suspended in March 2003 most tariffs and duties on imports, in the hope that this would perk up demand and energize the previously long-closed economy. On a level playing field, this would have been a rational calculation. Neighboring Iran, however, is supporting its domestic industries with generous subventions and is protecting them with high tariffs. This has been putting Iraqi companies at a distinct disadvantage, and the foreign trade results show it.

In 2007, for instance, Iraq ran a large merchandise trade surplus with total exports of USD 41.3 billion and imports of just USD 5.6 billion. Once one culls out oil trade, however, exports amounted to a mere USD 200 million while imports were USD 4.0 billion. This imbalance underscores how difficult it is for Iraqi manufacturers to compete with foreign rivals, especially those in Iran. The situation is not very much different in agriculture, which once made Iraq, with its two major rivers, the envy of many of its arid neighbors and a breadbasket for the Middle East. The farm sector is still Iraq's second-most-important industry after oil, but it now accounts for only about 8% of GDP after decades of neglect, international sanctions and underinvestment.

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In 2008, Iraq became a net food importer for the first time. Prime Minister Maliki has launched a USD 200 million initiative to stimulate the farm sector, a program that is subsidizing the sale of seeds and is providing support for livestock and date-palm industries, but the effects of such schemes still have to show themselves. Meanwhile, the country remains overly dependent on oil and with revenues from this resource dropping, the government has had to cut back its budget for this year several times. The 2009 household plan was first pegged at USD 80 billion. It now stands at USD 58.6 billion. Members of parliament will take a 10% cut in their own salaries (to about USD 7,600 a month), but each will continue to have a budget of USD 12,800 per month for body guards.

The country does have a short-term cushion thanks to roughly USD 35 billion in unspent oil revenues it has accumulated in bank accounts (some held by the U.S. Federal Reserve), but unless the volume of oil exports increases as well as the prices, the government could run through this amount very quickly. Total U.S. reconstruction assistance was ...